Subsidies seen endangering OPEC prosperity

By OGJ editors
HOUSTON, Oct. 26
-- Member countries of the Organization of Petroleum Exporting Countries are thriving on oil export revenue but, in many cases, eroding their export capacities by subsidizing domestic consumption, warns the Centre for Global Energy Studies, London.

In its Industry Watch report, CGES calculates that OPEC producers have generated almost $5 trillion in oil-export revenue since 1998, a year of unusually low revenue when the average crude price was only $12.30/bbl.

Annual revenue for OPEC members, according to CGES, totaled $103 billion in 1998 and will be about $631 billion this year. The peak was $866 billion in 2008, when crude prices reached unprecedented levels.

The revenue gains resulted from a rapid increase in the price of crude oil over most of the period. Group production during 1998-2010 increased by an average of only 0.6%/year. Export growth was even lower at 0.2%/year.

Rapid growth in domestic consumption has lowered export rates in many OPEC countries. While global oil demand growth averaged 1.2%/year, demand in most OPEC countries increased by more than 3%/year during 1998-2010, CGES says.

Demand in Qatar, Angola, and the UAE increased by more than 5%/year. In Kuwait, the growth rate was 4.7%/year and in Saudi Arabia, 4.5%/year.

“A key reason for such rapid rates of increase in oil demand is the heavy subsidization, via low retail prices, of oil consumption in most of these countries,” CGES says.

The analyst group expects OPEC export revenue to remain near $600 billion/year because of Saudi Arabia’s desire to keep the crude price above $70/bbl and the rising need for OPEC crude as global demand expands and non-OPEC supply reaches a plateau.

But “surging” consumption within the exporters’ group will trim export amounts and add to pressure on members to seek higher oil prices to sustain earnings, CGES warns.

“Unless OPEC’s citizens are weaned off oil subsidies, the organization will hit a barrier beyond which it will not be able to push the price of oil without harming its oil export revenues,” it says. “As things stand today, that barrier is still some way off, but it is out there somewhere, and OPEC should take heed.”

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